The rhetoric and reality of the U.S. trade deficit are sharply at odds. Listen to the rhetoric, and the United States is slowly becoming an economic has-been. Slipping technological prowess and a poor work force are making us an oversized Paraguay. Look at the reality, and another story emerges. The $156-billion trade deficit doesn't reflect lack of competitiveness so much as the huge pulling power of the U.S. market. It's the world's richest, most accessible market: an enormous global bazaar where everyone wants to sell.
If the United States were so uncompetitive, then U.S. exports would be faring poorly in world markets. They aren't. Since late 1985, the volume of American exports has risen by more than 20%. That's impressive, especially because economic growth abroad has been slow. Once the dollar began to depreciate from the extraordinary heights of the early 1980s, U.S. exports responded smartly. But imports are a different matter. The trade deficit remains high because imports haven't declined.
Go to a well-stocked toy store, and you can see what's happening. There are jigsaw puzzles from Germany and Britain. The import surge doesn't stem only from foreign companies invading the United States. American companies are also buying and manufacturing products abroad to defend their traditional markets. Fisher-Price sells plastic roller skates made in Taiwan. Another U.S. firm offers a 24-piece tool set made in Hong Kong and Poland.
Little wonder that everyone so covets the U.S. market. In 1985, consumer spending was three times higher in the United States than in Japan and 25% higher than in the European community. Total investment spending was 86% higher in the United States than in Japan and 14% higher than in the European community. The U.S. market is also more open. Europe is a jumble of national markets, with separate languages and customs; Japan has a cumbersome and closed distribution system. By contrast, the United States offers a genuine national market with a single language and an efficient distribution system.
The dollar's 60% appreciation between 1980 and 1985 was a competitive windfall for foreign exporters. They could either cut prices or fatten profit margins. They did a bit of both. Economist Richard Baldwin of Columbia University makes an important point: Fatter profit margins enabled many foreign firms to establish a beachhead in the U.S. market. The higher profit margins covered heavy start-up expenses for advertising and distribution networks. Strong U.S. economic growth further expanded the demand for imports.
But the dollar's subsequent drop isn't quickly reversing the flood of imports precisely because the U.S. market is so big and important. In theory, a depreciating dollar makes U.S. exports more competitive while imports become more expensive and less competitive. So far, only the export half of the theory is working. Imports are less affected for at least three reasons:
--Few companies gracefully withdraw from the U.S. market. Their dependence is too great. In 1986, Volvo sold more cars in the United States (110,000) than in Sweden (65,000). Japan sends roughly two-fifths of its exports to the United States. Eight major developing countries (Hong Kong, Taiwan, South Korea, Brazil, Mexico, India, China and Singapore) sell a third of their exports in the United States. To stay in the U.S. market, many exporters are shaving profit margins instead of raising prices.
--Even when exports to the United States become unprofitable, foreign firms may not stop. Rather than abandon the market, they may export until they can shift production to a profitable location--either the United States or another country. Not surprisingly, the dollar's depreciation has triggered a massive increase in foreign direct investment in the United States. Japanese car companies plan factories that, by the early 1990s, could produce more than 2 million cars in North America. Assuming all those plants are built, they may ultimately reduce car imports.
--American companies can't quickly undo decisions to manufacture or buy abroad. The decisions were often taken when the dollar was high and competition from foreign firms was intense. In some cases, new plants were built. In others, long-term supply contracts were signed. Sometimes alternative domestic suppliers are no longer available. Overseas production was especially important for the electronics industry, says William Finan, a Washington trade consultant.
This picture contradicts the conventional wisdom of America slipping into economic collapse. Of course, the United States has lost its huge technological superiority. But good U.S. companies still succeed overseas by adapting to the multitude of foreign markets.
The trouble is that higher exports alone won't quickly reduce the trade deficit. Protectionism isn't a solution, because it would simply give other countries a pretext to retaliate against rising U.S. exports.
What will happen? Imports could begin to drop sharply when foreigners shift production to new U.S. factories. The dollar may continue to depreciate, forcing some importers to quit. The United States could go into a recession, dampening demand for imports. No one knows: that's why the outlook for the world economy is so worrisome.
What's clear is that the U.S. trade deficit isn't just an American problem. Americans may be addicted to imports, but importers are also addicted to America.